How Elective ``Direct`` Pay works

Author: Abby Taggart

November 2023

How does Elective “Direct” Pay work?

The Inflation Reduction Act implemented by the Biden-Harris administration includes clean energy tax credits for federal income tax-exempt and government entities for the first time. Elective Pay (also called Direct Pay) comes in the form of tax-free cash payments from the IRS once clean energy tax credits are earned.

This is a big deal for US citizens on a local level. This part of Biden’s Clean Energy Plan will encourage cities to invest in clean energy like solar in ways they never had before. The resulting uptick in clean energy use will help achieve the US goal of achieving net 0 by 2050. 1

Who can use Direct Pay?

  • State, local, and territorial governments
  • Native Tribal governments
  • Rural energy cooperatives
  • Other tax-exempt entities like nonprofit organizations

How Direct Pay Works

Direct pay can be used for 12 of the Inflation Reduction Act’s tax credits. These include electricity production from renewable sources like solar and wind, purchase of electric vehicles, and installation of electric vehicle charging hubs. 3

Once the tax credit is earned, the entity must pre-register with the IRS before filing for the tax return. 4 If pre-registration isn’t completed, the tax return can’t be filed before the due date and the entity won’t receive their cash payment.

Entities wishing to claim direct pay need to complete the following steps:

    1. Complete the project, place it into service, and determine the corresponding tax year.
    2. Determine when your tax return will be due.
    3. Complete pre-filing registration with the IRS before your tax return is due.
    4. Once you receive a valid registration number, file your tax return by the due date, including extensions.
    5. Receive the direct payment. 2

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